KPMG Landscape Report TemplateDRAFT Development Fund for Iraq Interim results as of 30 June 2008...

DRAFT

Development Fund for Iraq

Interim results as of 30 June 2008IAMB Meeting 20-21 October 2008

Paris

1© 2008 KPMG Lebanon, a Lebanese Professional Civil Company and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative. All rights reserved. Printed in Lebanon.

I. Notice to the reader…………………………………………………… 2

II.

III.

IV.

V. Variance Analysis of Export Sales…………………………………… 8

VI.

VII.

VIII.

Scope of work and Deliverables………………………………………

Interim Review—Entities visited…..………………………...............

Unaudited Interim Financial Statements……………………………

Key Issues….…….....………………………………………………….

Next Steps……………………………………………….....................

Q & A……..….…………………………………………………………

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Table of Contents

DRAFT for discussion purpose only


I. Notice to the Reader

This Presentation summarizes our conclusions and findings as a result of our review of the Draft Interim Statement of Cash Receipts and Payments for the period from 1 June 2008 to 30 June 2008 (“Draft Interim Financial Statement”) of the Development Fund for Iraq (“DFI”). Our review has not been finalized to date, and our conclusions and findings may change as a result of further work. Only our final review report is binding.

This Presentation includes financial information extracted from the Draft Interim Statement of Cash Receipts and Payments for 1 January 2008 to 30 June 2008 of the Development Fund for Iraq (“DFI”). The Interim Financial Statements are the responsibility of the Government of Iraq. The Draft Interim Financial Statement has not yet been approved by the Minister of Finance.

We have been engaged to perform a review of the Interim Financial Statement in accordance with International Standard on Review Engagements 2410, “Review of Interim Financial Information performed by the Independent Auditor of the Entity”. A review of interim financial information consists of making inquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit.

This Presentation includes certain issues relating to our review. These relate to completeness of export sales of petroleum and petroleum products, completeness of proceeds from frozen assets, completeness and accuracy of outstanding contractual commitments entered into by US Agencies, unrecorded barter transactions and understatement of cash receipts and cash balances for petroleum products sales proceeds deposited in SOMO and overstatement of cash receipts and cash balances for License fee of mobile telecommunication deposited in DFI. We have not yet finalized our review on the Interim Financial Statement. Our review report is likely to include qualifications relating to these issues.



I. Notice to the Reader (Cont’d)

The interim financial information contained in this Presentation is qualified in its entirety by reference to the Interim Financial Statement from which they are extracted and the notes thereto.

The Interim Financial Statement has been prepared in accordance with the International Public sector Accounting Standard “Financial Reporting Under the Cash Basis of Accounting”. The Interim Financial Statement and the financial information contained in this Presentation may not be suitable for another purpose.

The Interim Financial Statement and this Presentation are intended solely for the information and use of the Government of Iraq, the International Advisory and Monitoring Board of the Development Fund for Iraq and the Committee of Financial Experts and should not be used for any other purpose. We do not accept or assume responsibility for any other purpose or to any other person to whom this report is shown or into whose hands it may come.



Interim Review

Review of DFI Interim Statement of Cash Receipts and Payments for the six months ended 30 June 2008

Final Audit

Audit of DFI Interim Statement of Cash Receipts and Payments for the year ended 31 December 2008

Review report on DFI Interim Statement of Cash Receipts and Payments

Results of review procedures, key findings and recommendations

Presentation to the COFE and IAMB

October 2008

DeliverablesScope of work Due by

April 2009

II. Scope of work and Deliverables

Audit report on DFI Statement of Cash Receipts and Payments

Results of audit procedures, key findings and recommendations

Presentation to the COFE and IAMB



Entities visited to date September 2008 October 2009

Central Bank of Iraq (CBI)

Ministry of Finance (MOF)

State Oil Marketing Organization (SOMO)

Ministry of Oil (MOO)

III. Interim Review—Entities visited



IV. Unaudited Interim Financial Statement


Unaudited Interim Statement of Cash Receipts and PaymentsIn thousands of US DollarFor the six months ended 30 June 2008 2007 Variance

Cash ReceiptsExport sales of petroleum and petroleum products 31,236,926 13,813,989 17,422,937 Proceeds from frozen assets in foreign countries 833 1,174 (341)Interest Received 347,329 308,864 38,465 Other receipts 1,728,091 568,229 1,159,862 Total Cash Receipts 33,313,179 14,692,256 18,620,923

Cash PaymentsTransfers to the Ministry Of Finance 21,500,000 8,900,000 12,600,000 Letters of Credit for the benefit of Iraqi ministries 6,366,403 3,525,443 2,840,960 Contracts Administered by U.S. Agencies 281,225 41,313 239,912 Iraqi external debt repayments 80,918 111,180 (30,262)Other Payments 22,927 180,432 (157,505)Total Cash Payments 28,251,473 12,758,368 15,493,105

Excess of Receipts over Payments 5,061,706 1,933,888 3,127,818 Source: Ministry of Finance


IV. Unaudited Interim Financial Statement (Cont’d)


Unaudited Interim Statement of Cash Receipts and PaymentsIn thousands of US DollarFor the six months ended 30 June 2008 2007 Variance

Purchased Treasury Bills during the period (15,219,879) (6,567,908) (8,651,971)Proceeds from Treasury Bills on maturity during the period 7,904,659 6,640,772 1,263,887 Cash and cash equivalent, beginning of the period 2,547,331 1,466,657 1,080,674

Cash and cash equivalents, end of period 293,817 3,473,409 (3,179,592)

Treasury Bills, end of period 14,673,959 5,516,143 9,157,816

Cash and cash equivalents and Treasury Bills, end of period 14,967,776 8,989,552 5,978,224 Source: Ministry of Finance


V. Variance Analysis of Export Sales


Source: State Oil Marketing Organization (SOMO)

Quantity Sold from 1/1/2007 till 30/6/2007 in BarrelsMonth Basra Kirkuk TotalJan 36,793,559 3,027,587 39,821,146 Feb 43,886,714 - 43,886,714 Mar 48,022,037 - 48,022,037 Apr 47,824,583 - 47,824,583 May 48,533,656 - 48,533,656 Jun 45,134,446 - 45,134,446 Total 270,194,995 3,027,587 273,222,582

352,687,596 73,866,504 278,821,092 Total58,083,213 14,469,035 43,614,178 Jun62,320,413 13,757,284 48,563,129 May57,043,485 13,253,537 43,789,948 Apr59,465,358 9,926,439 49,538,919 Mar56,095,904 11,413,845 44,682,059 Feb59,679,223 11,046,364 48,632,859 Jan

TotalKirkukBasraMonthQuantity Sold from 1/1/2008 till 30/6/2008 in Barrels

Quantity Sold Trend

0

10,000,000

20,000,000

30,000,000

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50,000,000

60,000,000

70,000,000

Jan Feb Mar Apr May Jun

Months

Tot

al Q

uant

ity S

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Quantity 2007Quantity 2008


V. Variance Analysis of Export Sales (Cont’d)


Source: State Oil Marketing Organization (SOMO)

Prices/Barrel from 1/1/2007 till 30/6/2007 in USD

Month Average price Total priceJan 48.69 1,939,029,251 Feb 50.45 2,214,128,922 Mar 55.07 2,644,448,626 Apr 56.96 2,724,263,421 May 60.9 2,955,884,031 Jun 64.58 2,914,558,444

56.34 15,392,312,695

35,732,106,509 101.31 7,140,939,129 122.94Jun7,176,470,820 115.15May5,922,285,685 103.82Apr5,643,521,691 94.9Mar5,036,777,041 89.79Feb4,812,112,143 80.63Jan

Total priceAverage priceMonth

Prices/Barrel from 1/1/2008 till 30/6/2008 in USD

Trend of Average prices

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20

40

60

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140

Jan Feb Mar Apr May Jun

Months

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rage

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Average price 07Average price 08


DFI receipts are predominantly from the export sales of petroleum. The IAMB recommended the installation of a comprehensive oil metering system in Iraq and in accordance with standard oil industry practices, While the Iraqi Government supports oil metering, progress has been slow. Some metering has been installed at oil terminals, but metering systems in the oil fields have not been installed yet.

Consequence: In the absence of a comprehensive metering system,

completeness of revenue in the interim financial statement cannot be

assured.

VI. Key Issues



VI. Key Issues (Cont’d)

In accordance with the provisions of UNSCR 1483, all frozen assets in foreign countries and their economic resources shall be transferred to the DFI. Our inquiries revealed that the DFI does not maintain complete records of all frozen assets which it is entitled to receive.

Consequence: completeness of proceeds from frozen assets in

foreign countries in the interim financial statement cannot be

assured.




The former Coalition Provisional Authority did not maintain complete accounting records for contractual commitments entered into by the U.S. Agencies for the period from inception to 28 June 2004.

Consequence: completeness and accuracy of the outstanding

contractual commitments balance as of 30 June 2008 cannot be

assured.




Barter sales of petroleum and petroleum products were not recorded in the interim financial statement.

Consequence: receipts and payments are understated for an amount

of U.S. Dollars 426,050 thousand from inception till 30 June 2008.




Cash receipts amounting to U.S. Dollars 1,312,005 thousands relating to License fee of mobile telecommunication were incorrectly recorded in the DFI.

Consequence: cash balances as at 30 June 2008 and cash receipts

for the period from 1 January 2008 till 30 June 2008 are overstated

by U.S. Dollars 1,312,005 thousands .




Cash received from export sales of petroleum products during theperiod ended 30 June 2008 amounting to U.S. Dollars 778,822 thousand has been deposited in bank accounts controlled by the Oil Marketing Company (SOMO). According to UNSCR 1483 (2003), 95% of the proceeds of export sales of petroleum and petroleum products should be deposited in the DFI account.

Consequence: cash receipts for the period ended 30 June 2008 and

the cash balance as of 30 June 2008 are understated by U.S. Dollars

739,881 thousand.




Letters of credit cash payments during the period from 1 January 2008 to 30 June 2008 and from 1 January 2007 to 30 June 2007 include payments related to certain self-financing governmental entities that are not covered by the DFI.Conversely, the MOF -received advance payments from these entities to fund their letters of credit payments which have been deposited in the MOF accounts at the CBI and have not been transferred to the DFI account at the FRBNY. Management could not assess the amounts that were received by the Ministry of Finance from these self financing entities nor could assess the amounts paid by the DFI to finance the letters of credits issued for the benefit of these self financing entities.

Consequence: we could not assure completeness and accuracy of amounts received by the Ministry of Finance from these self financing entities and the amounts paid by the DFI to finance the letters of credits issued for the benefit of these self financing entities.



VII. Next Steps

Work to be performed Oct 08 Nov 08 Dec 08 Jan 09 Feb 09 Mar 09 Apr09

Performing test of controls over MOO, SOMO, MOF, US Agencies, CBI

Visiting Iraqi Ministries in Baghdad and the Kurdistan region



VII. Next Steps (Cont’d)


Receiving third party confirmation

Visiting the remaining Iraqi ministries and update interim work

Completing the test of oil export sales at SOMO

Completing the test of Oil Proceeds Receipts Account at FRBNY

Test cash receipts from oil export sales





Testing cash payments from DFI

Review the reconciliations between the MOF and other DFI related parties

Testing the cash balances at the FRBNY at year end

Testing records and reconciliation of DFI main and sub-accounts





Preparing drafted audit report and management letters

Submission of drafted audit report and management letters


DRAFT

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